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Debt Hike for Business Development Companies in Works

Tickers in this article: CG GS

NEW YORK (The Deal) -- Rep. Carolyn Maloney is expected soon to introduce a bill she said she believes regulators, Democrats and Republicans will support that would allow business development companies, or BDCs, to increase their leverage as long as the debt hike gets shareholder backing first, according to people familiar with the discussions.

The bill is likely to obtain broad bipartisan approval on Capitol Hill if it can get the backing of the Securities and Exchange Commission. The New York Democrat, who is the second-highest ranking Democrat on the House Financial Services Committee, has been working on the measure with the committee's chairman, Rep. Jeb Hensarling, R-Texas, and other lawmakers, according to people familiar with the effort.

Her attempt comes after a previous Republican-backed bill seeking to expand these funds, which are major lenders to the lower and middle markets, failed to obtain any Democratic support, largely because SEC Chairwoman Mary Jo White wrote a letter to lawmakers opposing it. The Obama administration likely would have vetoed that previous bill, according to sources.

White said in her letter, obtained by The Daily Deal in October, that the previous bill, introduced by Rep. Michael Grimm, R-N.Y., and a similar one released by Rep. Nydia Velazquez, D-N.Y., would have allowed BDCs to issue an "unlimited" amount of preferred stock, "effectively eliminating ... limitations on leverage."

However, Maloney's compromise, according to details obtained by The Deal, would limit the total amount of preferred stock a BDC can issue, effectively putting a cap on leverage. It also would maintain Investment Company Act investor protections for retail investors and require the approval of a majority of participating shareholders to increase debt. Greater disclosure would also be needed, according to details of the bill, so that investors are aware that the BDC they are invested in has greater leverage.

It is unclear whether the SEC would support the compromise measure. SEC officials declined to comment. However, Maloney told The Daily Deal that she is working to address the SEC's concerns, adding that she was hopeful that a BDC compromise would move forward early in 2014. She said negotiations over the language of the bill are "ongoing."

Observers familiar with the measure contend that it could be amended to the Grimm legislation and brought up for a vote by the full House in the coming months. Alternatively, the measure could be considered along with the Grimm bill by the House Financial Services Committee, with the hope that it would receive a broader bipartisan support. If it did it would then be considered by the full House. People familiar with the situation contend that a strong bipartisan vote in the House would drive legislative action in the Senate, where currently no companion bill exists, but some senators are considering legislation.